The Raghuram Rajan effect: Stocks rally, bond yields crash

SummaryRBI Guv Raghuram Rajan moved to shed his hawkish inflation stance and surprised the markets.

Three months into his new job, RBI Governor Raghuram Rajan today moved to shed his hawkish inflation stance and surprised the markets and analysts by unexpectedly holding key rates.

This comes barely a week after both retail and wholesale inflation continued to climb, leading to expectations of another rate hike.

The RBI decision boosted equities and sent bond yields crashing 13 basis points. The rupee gained intra-day but pared the gains ahead of the US Fed meeting outcome.

Raghuram Rajan was vocal about the impact of his decision when he refused to be identified in the league of either former US central bank chief and inflation hawk Paul Volcker or the more accommodative Janet Yellen, nominated to lead the Federal Reserve.

"Your Volcker, Yellen etc... how about a Raghuram Rajan (effect)?" RBI Guv quipped when asked which camp he belonged to after he shed his hawkish inflation stance.

In a surprising move, Raghuram Rajan left the repo, or short-term lending rate, and the cash reserve ratio unchanged at 7.75 per cent and 4 per cent, respectively.

"The high level of CPI inflation, excluding food and fuel, leave no room for complacency. There is, however, reason to wait before determining the course of monetary policy," Raghuram Rajan said in the Mid-Quarter Monetary Policy Review.

"I should end with a description of what we have been doing in the last few months. I think it is course of the elephant - we say what we will do, we do what we said," Raghuram Rajan later told analysts on a conference call.

The decision came even as wholesale price index-based inflation quickened to a 14-month high of 7.52 per cent in November, while consumer price index inflation accelerated to 11.24 per cent, strengthening the view of market participants of an at least 25 basis point (bps) rate hike.

"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant," Rajan said.

Explaining the RBI's rationale for today's policy stance, the Governor said, "We are not soft on inflation. We are waiting for more data. As the data come in, we will react appropriately."

The apex bank's decision was a big relief to borrowers and the markets, with the Sensex gaining 248